Question

Zammillo Corp. owns and operates a variety of resorts in the United States and Canada. The following ﬁnancial information was obtained from the company’s 2008 and 2009 ﬁnancial statements. Amounts are expressed in thousands.

In the company’s annual report, executives discussed aggressive future expansion plans. Following are specific comments addressing the issue of how and whether the company would be able to ﬁnance these plans.
The company’s plans to develop new resort opportunities and expand existing operations will require substantial amounts of additional capital. There is no assurance at this time that such financing is or will be available to the company or, if available, that the financing would be on favorable payment terms.
Required:
(a) Compute Zammillo Corp.’s long-term debt to equity and times interest earned ratios for 2008 and 2009. Did these ratios improve or weaken between the end of 2008 and the end of 2009?
(b) Considering the ﬁnancial data presented for the company, what factor was apparently most responsible for the significant change in Zammillo’s long-term debt to equity ratio between the end of 2008 and the end of 2009? Explain.s
(c) Suppose that the average long-term debt to equity ratio for the resort industry is 65 percent and that the average times interest earned ratio is 4.5. Evaluate Zammillo Corp.’s ratios in reference to these industry norms.
(d) What purpose is served by the narrative disclosures in the company’s annual report regarding the potential need for additional capital and related information?